If you're in an outpost then the other characters detail is always lower than yours even when you have your setting turned up. It is a limitation of the game and something that is in place so there isn't a huge demand on computer resources in busy districts.

There is a mod (KSMod I believe) which can display high res character textures on other users when in outposts.

It shouldn't happen outside outposts in an explorable area. If so try re-downloading your .dat file by renaming/deleting the current one and launching the game.

This happens in all outpost, the only time you see full rendered armor on other players is when you join an instance with them. This is done so that low end machines can still play the game without problems.